It’s open enrollment season for workplace benefits. You’ll soon be getting a notice from HR, or maybe you already have.
If you’re young, single and healthy, it’s tempting to skip reading all that fine print. Just sign up for whichever health plan is cheapest and ride along with the “default” contributions and options in your 401(k). It’s kind of like clicking the “I accept” button on those endless disclosures that come with every new app. There’s no percentage in reading it, you figure, because you have to accept the conditions to use the app.
But being informed during open enrollment is different. Understanding how certain benefits work before enrolling in them can end up saving you money, or protecting you from financial distress—in the long run.
All benefit plans are unique, so yours will vary depending on your employer. But keep these things in mind while choosing your benefits this enrollment season (and if you need some more help, check out these top secrets to cracking the open enrollment code.)
1. Your Default 401(k) Funds Might Be Costly
Saving for retirement is a smart move. And picking an employer who sponsors a 401(k) or similar plan and matches your contributions is an even smarter one. In a typical match, for every $1 you save up to some percent of salary (typically 6%), your employer will kick in 50 cents—or if you’re lucky, $1.
Experts harp on the importance of enrolling in company-sponsored 401(k) plans. Moreover, companies are increasingly adopting automatic enrollment—meaning if you don’t opt out, you’re automatically enrolled to contribute to the plan and your money is invested in certain “default” funds. But one problem with allowing yourself to be automatically enrolled and then ignoring your 401(k) is those default funds may be costing you more than they should.
If you don’t pick your own funds, your plan will typically default you into a target date fund—-a fund of funds whose allocation between stocks and bonds is based on your age, with younger workers having more stocks. Such funds can be a good, low-hassle, low-cost choice. Or, not.
According to mutual fund tracker Morningstar, the average annual fee for target date funds dropped to 0.62% of assets in 2018, but charges are all over the lot. Vanguard’s target funds, which are made up exclusively of index funds and hold more than a third of all target date assets, had an average expense ratio of just 0.12%. But some other, smaller providers charged in excess of 1%, according to Morningstar’s 2019 Target-Date Fund Landscape Report.
By all means, allow yourself to be enrolled in your employer’s 401(k). But take benefits season as an opportunity to review what funds you’re investing in and how much they charge. Also, review your contribution level. The default contribution rate—often just 3%—isn’t enough to guarantee you a decent retirement, and might not even be enough to get you the full match.
2. Pre-Tax Transit Benefits Are Worth The Ride
If you live in a big city, then you know how quickly commuting costs can add up.
Employers in major metro areas usually offer transit benefits. Some are even required by law to; companies with 20 or more full-time, non-union employees in New York City must offer commuter benefits.
For 2020, commuters can contribute up to $270 per month, pre-tax, to an account used strictly for commuting costs. This money can be used for public transportation (such as trains, buses, ferries), qualifying rideshares (such as Uber or Lyft) and van pools.
Here’s the key. This money is not only before income taxes, but before “payroll” taxes—-the 7.65% deducted from your paycheck for Social Security and Medicare. So you’re saving that, plus federal and state income taxes. Depending on your tax rate, it could add up to a savings of 20%, 30% or more.
Before enrolling in transit benefits, though, you’ll want to do careful math on how much you should contribute each month to the account. While benefits can be carried over from month to month and even year to year, you’ll lose any excess money you set aside if you leave the company.
3. Yes, You Do Need Disability Insurance
Young people might think they’re invincible. But the reality is that 20% of current 20-year-olds will become disabled at some point in their career, according to the Social Security Administration.
The most common reasons why people find themselves out of work long-term isn’t because of freak accidents—it’s because of back pain, cancer, diabetes or arthritis. The average monthly disability benefit at the beginning of 2019 was about $1,234—which the Social Security Administration points out “is barely enough to keep a beneficiary above the 2018 poverty level.”
Disability insurance can be a way to supplement that income and keep disabled individuals from falling into financial turmoil during their time away from work. There are two types of disability insurance: Short term and long term.
Short-term disability is for occurrences that have shorter recovery periods. Under these policies, coverage kicks in quickly once you’re disabled and usually after you run out of sick leave. Examples of cases when short-term disability is relevant is for surgeries and injuries that prevent your from working, like a broken hand. Short-term disability coverage can also provide pay for women during the period of disability after giving birth to a child, and can be stacked with their company’s maternity leave policy.
Long-term disability requires a waiting period (usually three to six months) before the coverage will go into effect. This insurance will provide payments for a longer period of time compared to short-term disability, and can cover individuals suffering from cancer, heart disease, mental illnesses and more.
Keep in mind that the definition of being disabled will vary according to your employer’s plan. The recommended benefit is coverage that replaces at least 60% of your after-tax income, according to MetLife.
4. FSAs Aren’t Just For Families
Tired of those contact lenses? Saving up for laser eye surgery? Or maybe you’ve got a little orthodontia planned as part of your self-improvement plan.
Then pay attention to the Medical Flexible Spending Arrangement your company may offer. The money—up to $2,750 for 2020—goes into an FSA before tax, and generally must be spent during the calendar year, or it’s forfeited. (Some employers let you carry over $500 into the next plan year.) That means funding an FSA doesn’t usually make sense for a healthy young single who sees doctors only for check-ups.
But you can also use the money in your FSA to pay for procedures your medical plan likely doesn’t cover—-and those include laser eye surgery. Have dental insurance? It’s unlikely to cover the full cost of orthodontia and you can use FSA money for that too.
One advantage of using an FSA is that the full amount you’re putting away for the year is available from the start. So if you’re saving $2,000 over 2020 in an FSA, you can use that full $2,000 in January for laser eye surgery.
5. Student Loan Repayment Benefits are Taxable Income
Eager to attract educated, but student-debt burdened Millennial workers, companies have begun offering help repaying student loans as an employee benefit.
But that assistance could come back to bite you at tax time—-so plan accordingly.
Payments made by an employer towards an employee’s student loans are treated as taxable income, not as a tax free benefit. That doesn’t mean student loan repayment help isn’t a nice perk—it is. But be prepared for a higher tax bill.
Some workers will be able to deduct interest paid on their behalf by their employers. But this is a limited benefit. Only $2,500 of student loan interest is deductible per tax return and that includes both what you paid and what your employer paid on your behalf. Plus, if you earn too much your eligibility to claim the student interest deduction phases out. For 2020, that phase out begins at $70,000 and ends at $85,000—meaning if your modified adjusted gross income is $85,000 or more you get no student interest loan deduction.
Don’t confuse the new loan repayment benefit with the more widespread tuition reimbursement benefit. If your employer offers tuition reimbursement, it can pay for up to $5,250 of your schooling costs a year, without it counting as taxable income to you.
Why should student loan repayment be taxable and tuition reimbursement be excluded from your taxable income? Doesn’t sound fair, does it? In fact, legislation proposed in the House, the Employer Participation in Repayment Act of 2019. would extend the $5,250 per employee education exclusion tax treatment to loan repayment too.
6. Your Employer Might Assist With Charitable Giving
Millennials, despite their financial problems, seem keen to give back. So volunteer and charitable match programs, as an employee benefit, have been spreading.
For example, Benevity, a cloud-based platform that makes both donating and coordinating volunteer work easy, has more than 600 employers, including Coca-Cola and Samsung, using its platform.
Many big companies will match your contributions dollar for dollar up to a certain amount each year; a handful even provide a 2-to-1 or 3-to-1 match for your giving. Just remember that come tax time you will only be able to deduct your portion of the charitable contribution, not your employer’s, if you do decide to itemize rather than claiming the standard deduction.